The expansion of the U.S. energy industry bolstered America’s GDP and strengthened its national security.
Now, the coronavirus pandemic threatens to reverse decades of gains despite an OPEC+ production cut agreement to end the Saudi Arabia-Russia oil price war. Petroleum storage is rapidly filling at great cost to producers who are desperate to avoid halting operations.
Although the price of crude climbed back into the teens after becoming negative for the first time in history, once the last tankers and depots are filled new lows could be witnessed. Bankruptcy filings have already started to roll in, and relief remains far out of sight. Onlookers to this unprecedented crisis are confused as to why a purportedly successful agreement failed to buoy U.S. producers.
Despite their public visibility, high-level negotiations are rarely effective solutions for crises of domestic industry. In this instance, the resulting agreement was particularly far removed from the reality on the ground. Those who envisioned a cure-all deal erroneously assumed that just because the U.S. was harmed by the onset of the price war that it would necessarily benefit from its conclusion. Any deal was always going to be too little too late, and the final agreement was far too narrow to prevent energy adversaries from circumventing the stipulated cuts and advancing their interests through other mechanisms. For Saudi Arabia and Russia, the economic consequences of modest production cuts were secondary to the leverage they provided against non-cartelized producers. The agreement did little more than force the U.S. to choose between offering concessions to bring about the end of a conflict it had no hand in initiating, or assume blame for impeding negotiations while domestic producers continued to suffer.
While Saudi Arabia and Russia are responsible for exacerbating a crisis for political gain, the oil price war merely accelerated an imminent glut. That damage is now irreversible, and government must move quickly to help the U.S. energy industry survive. Unfortunately, policymakers continue to chase the wrong solutions. Some have advocated tariffs on energy adversaries, which will hurt American importers more than foreign producers. Others have proposed mandated production cuts, which are divisive at best and self-sabotaging at worse. These proposals are flawed in the same way as the original trade agreement: their efficacy relies on government-interference in private industry and cooperation with international competitors. To avoid the worst, it is imperative that lawmakers shift their focus from distracting foreign policy stopgaps to smart domestic action.
Several targeted domestic policies have already helped to mitigate the crisis. The U.S. Government has started taking deliveries to the Strategic Petroleum Reserve, which has bought the industry time to find alternative storage solutions. Meanwhile, the EPA has suspended enforcement of certain environmental regulations to prevent undue disruptions to production, and some states are considering allowing pipeline companies to store, rather than transport oil. Although these measures are not sufficient on their own, all three empower the private sector to respond to the crisis without interfering in the free market.
Independent of which support mechanisms are ultimately adopted, it is crucial that policymakers remember why the U.S. energy sector succeeded in the first place. Unlike other major energy producing countries, the United States does not have a nationalized oil and gas industry. Heterogeneity allowed producers to prosper, and their success contributed to stronger energy security, a healthier economy, and greater resilience to foreign price manipulation. Now that the industry is under siege, the U.S. ought to defend producers without depriving them of the independence that facilitated their growth. The correct response to foreign cartelization is not capitulating to adversaries’ wishes for production cuts, but instead taking advantage of a unique policy window to drive a strong domestic response rooted in free market principles that emphasizes public-private partnerships. If implemented correctly, such an approach would protect the U.S. energy industry until it is ready to resume international competition.
Editor’s Note: The main image accompanying the above guest column shows Ret. Maj. Gen. James ‘Spider’ Marks, the author of the op-ed. The op-ed appears in The Rio Grande Guardian with the author’s consent.
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